1 Introduction to Cost and

Transcription

1 1 Introduction to Cost and Management Accounting Concept of Cost Evolution of Cost Accounting Costing, Cost Accounting and Cost Accountancy Objectives, Importance and Scope of cost accounting Classifications and Elements of Cost Cost Centre and Cost Unit Methods and Techniques of Costing Cost Accounting Standards Installation of a Costing System Practical Difficulties in Installing a Costing System Role of Cost Accountant in Decision Making This Chapter Includes Marks of Objective Questions Management Accounting and its evolution, Meaning, Objectives, Nature and Scope Tools and Techniques of Management Accounting Relationship of Cost Accounting, Financial Accounting, Management Accounting and Financial Management Limitations of Management Accounting Conflicts in Profit versus Value Maximisation Principle Role of Management Accountant in Decision Making. 2.1

2 2.2 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) Chapter at a Glance MEANING 1. Cost: Cost refers to the expenditure incurred in producing a product or in rendering a service. It is expressed from the producer or manufacturer s viewpoint. (not that of consumer/ end user.) Cost ascertainment is based on uniform principles and techniques. 2. Costing: The technique and process of ascertaining cost. 3. Cost Accounting: The process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs. 4. Cost Accountancy: The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived for the purpose of managerial decision-making. OBJECTIVES Ascertainment of Cost: This involves collection of O F C O S T cost information, by recording them under suitable ACCOUNTING heads of account and reporting such information on a periodical basis. 1. Determination of selling price: Selling price is influenced by a number of factors. However, prices cannot be fixed below cost save in exceptional circumstances. Hence, cost accounting is required for determination of correct selling price. 2. Cost Control and Cost Reduction: In the long run, higher profits can be achieved only through Cost Reduction and Cost Control.

3 [Chapter 1] Introduction to Cost and... O 2.3 ADVANTAGES OF A COST ACCOUNTING SYSTEM 3. Ascertaining the profit of each activity: Profit of each department/ activity/product can be determined by comparing its revenue with appropriate cost. Hence, cost accounting ensures profit measurement on an objective basis. 4. Assisting management in decision-making: Business decisions are taken after conducting Cost-Benefit Analysis. Hence, cost and benefits of each option are analysed and the Manager chooses the least cost option. 1. Profit Measurement and Analysis: Cost should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact cause for decrease or increase in the profit / loss of the business. 2. Cost Reduction: The application of cost reduction techniques, operations research techniques and value and analysis technique, helps in achieving the objective of economy in concern s operations. 3. Cost Comparison and Cost Control: Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter-firm comparison methods. 4. Identification of losses and inefficiencies: A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variance Analysis techniques points out the deviations from pre-determined level and thus demands suitable action to eliminate its recurrence.

4 2.4 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) FEATURES OF A GOOD COST ACCOUNTING SYSTEM 5. Financial Decision Making: Managers can obtain relevant information from the Cost Accounting System, to serve as guides in making decisions involving financial considerations. Guidance whether to purchase or manufacture a given component, whether to accept orders below cost, which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short-term decisions. 6. Price Determination: Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filing tenders. 1. Accuracy of data: The data to be used by the Cost Accounting System should be accurate. Otherwise it may distort the output of the system. 2. Relevance of data: The system should handle and report relevant data for use of managers for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary details. 3. Simple and easy to operate: The system should be tailor-made, practical, simple and capable of meeting the requirements of a business concern. 4. Participative Roll of executives: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of cost Accounting. 5. Cost - Effective: The cost of installing and operating the system should justify the results. The benefits from the system should exceed the amount to be spent on it. 6. Management s Role: The top management

5 [Chapter 1] Introduction to Cost and... O 2.5 FACTORS FOR INSTALLING A COST ACCOUNTING SYSTEM should have a faith in the Costing System and should also provide a helping hand for its development and success. 7. Smooth implementation: The system should be effectively implemented. A carefully phased programme should be prepared by using network analysis for the introduction of the system. 1. Scope of Coverage: The areas of operation of business wherein the managements action will be most beneficial. The system of costing in each case should be designed to highlight, in significant areas, factors considered important for improving the efficiency of operations in that area. 2. Objective: The objective of the system e.g. whether it is being introduced for fixing prices or for insisting a system of cost control. 3. Technical aspects: The technical aspects of the concern, methods and techniques of production used, extent of services rendered to manufacturing departments by other services departments, standards of production efficiency. 4. Organisational Set-up: The general organisation of the business, with a view to find out the manner in which the system of cost control could be introduced, without altering or extending the organisation set-up appreciably. 5. Impact of expansion on cost: The manner in which different variable expenses would be affected with expansion or cessation of different operations. 6. Psycho-social aspects: The attitude and behaviour of people in the organisation, the manner in which the benefits of introducing Cost Accounting could be explained to various peoples in the concern, specially those incharge of

6 2.6 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) production department and awareness created for the necessity of promptitude, frequency and regularity in collection of cost data. 7. Impact on Accounting System: The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and in which results of separate sets of accounts, cost and financial, could be reconciled by means of control accounts. 8. Information requirements: The maximum amount of information that would be sufficient and how the same should be secured without much clerical labour, Degree of accuracy of data collected, responsibility for verification of data etc. CLASSIFICATION OF COST 1. On the basis of Time Period (a) Historical Cost : Cost relating to the past time period; Cost which has already been incurred. (b) Current Cost: Cost relating to the present period. (c) Pre-determined Cost: Cost relating to the future period; Cost which is computed in advance, on the basis of specification of all factors affecting it. 2. On the basis of Behaviour/ Nature / Variability (a) Variable Cost : This is the cost that tends to vary or change in relation to volume of production. It increases in total as production increases and vice-versa e.g. cost of raw materials, direct wages etc. However, variable

7 [Chapter 1] Introduction to Cost and... O 2.7 costs per unit are generally constant for every unit of the additional output. (b) Fixed Cost : This is the cost that remains constant at various levels of production. They are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed Costs per unit vary inversely with volume of production, (c) Semi variable Cost: This is the cost which is partly fixed and partly variable. It is fixed upto a particular volume of production and become variable thereafter for the next level of production. Hence, it is also called Step Cost. Examples are Repairs and Maintenance, Electricity. 3. On the basis of Elements (a) Materials: Cost of tangible, physical input used in relation to output/ production; e.g. costs of raw materials, consumable stores, maintenance items etc. (b) Labour: Cost incurred in relation to human resources of enterprise; e.g. wages to workers, salary to office staff, training expenses etc. (c) Expenses: Cost of operating and running the enterprise, other than materials and labour; this is the residual category of costs. e.g., Factory Rent. 4. On the basis of Relationship (a) Direct Cost: Cost that is directly related to / identified with / attributable to a Cost Centre or a Cost unit. e.g., Cost of basic raw material used in the finished product, wages paid to site labour in a construction contract etc. (b) Indirect Cost: Cost that is not directly identified with a cost centre or a cost unit. Such costs are apportioned over different cost

8 2.8 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) centres using appropriate basis. e.g., Factory Rent incurred over various departments; 5. On the basis of Controllability (a) Controllable Costs: Costs which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following factors. (i) Time: Certain costs are controllable in the long run and not in the short run. (ii) Location: Certain costs are not influenced and decided at a particular location / cost centre. If rent agreements of all factor premises are executed centrally at the Head Office, factory managers cannot control the incurrence of costs. (iii) Product / Output: Certain costs are controllable by reference to one product or market segment and not by reference to the other. For example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concession duty drawback is available for export sales. (b) Non-Controllable Cost: The cost that cannot be influenced and controlled by a specific member of the organisation. The Line of difference between controllable and non-controllable costs is thin. 6. On the basis of Normality (a) Normal cost : Cost that can be reasonably expected to incur under normal, routine and regular operating conditions. (b) Abnormal Cost: Cost over and above normal cost; that is not incurred under normal operating conditions e.g. fines and penalties.

9 [Chapter 1] Introduction to Cost and... O On the basis of Functions (a) Production Costs: The costs of the set of operations commencing with supply of materials, labour and services and ends with the primary packing of product. Thus it is equal to the total of Direct Materials, Direct Labour, Direct Expenses and Production Overheads. (b) Administration Costs: The cost of formulating the policy, directing the organisation and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. Some examples are Office Rent, Accounts Department Expenses. (c) Selling Cost: The cost of incurred to create and stimulate demand and of securing orders. These are sometimes called marketing costs. Some examples are Advertisement, Salesmen remuneration, Show-room Expenses, Cost of samples etc. (d) Distribution Cost: The cost of the sequence of operations which begins with making the packed product available for despatch and ends with making the reconditioned returned empty package, if any, available for re-use. Some examples are Distribution packing (secondary packing), carriage outwards, maintenance of delivery vans, expenditure incurred in transporting articles to central or local storage, expenditure incurred in moving articles to and from prospective customers (as in or Return) etc. (e) Research cost: The cost of research for new

10 2.10 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) or improved products, new applications of materials or improved methods. (f) Development Costs: The cost of the process which begins with the implementation of the decision to produce a new or improved product, or to employ a new or improved method and ends with commencement of formal production of that product or by that method. (g) Pre-Production Cost: The part of development cost incurred in making a trial production run prior to formal production. (h) Conversion Cost: The sum of direct wages, direct expenses and overhead costs of converting raw materials to the finished stage or converting a material from one stage of production to the other. 8. On the basis of Attributability to the Product (a) Period cost: The cost which is not assigned to the product but is charged as expense against the revenue of the period in which they are incurred. Non-manufacturing cost e.g. Selling and Distribution Cost are generally recognised as period costs. This is not included in inventory valuation. (b) Product Cost: The cost which is assigned to the product and is included in inventory valuation. These are also called Inventoriable costs. Under absorption costing total manufacturing costs are regarded as product cost while under marginal costing, only variable manufacturing cost is considered. The purpose of computing product cost is as under: (i) Preparation of Financial Statements: Focus on inventory valuation and reporting

11 [Chapter 1] Introduction to Cost and... O 2.11 profits. (ii) Product pricing: Focus on cost assigned and incurred on the product till it is made available to the customer / user. (iii) Cost-plus-Contract with Government Agencies: Focus is on reimbursement of cost specifically assigned to the particular job / contract. 9. On the basis of Relevance to decision making (a) Relevant Cost: The cost which is relevant and useful for decision-making purposes. (i) Marginal Cost: Marginal cost is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with production whereas fixed cost remains fixed irrespective of volume of production. Marginal cost is a relevant cost for decision making as this cost will be incurred in future for additional units of production. (ii) Differential Cost: It is the change in cost due to change in the level of activity or pattern or method of production. Where the change results in increase in cost it is called incremental cost, whereas if cost is reduced due to decrease of output, the difference is called decremental cost. (iii) Opportunity Cost: This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm may finance its expansion plan by withdrawing money from its bank deposits. In such a case, the loss of interest on the bank deposit is the opportunity cost for

12 2.12 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) carrying out the expansion plan. Opportunity cost is a relevant cost where alternatives are available. However, opportunity cost does not find any place in formal accounts and is computed only for decision making and analytical purposes. (iv) Out-of-pocket Cost: This entails current or near future outlays of cash for the decision it had as opposed to cost which do not require any cash outlay such as depreciation. Such cost is relevant for decision-making, as this will occur in near future. It is that portion of total cost which involves cash outflow. This cost concepts is a short-run concept and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket cost can be avoided or saved if a particular proposal under consideration is not accepted. (v) Replacement Cost: It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current marketing price and is relevant for decision-making. (vi) Imputed Cost: This is notional cost appearing in the cost accounts only e.g. notional rent charges, interest on capital for which no interest has been paid. Where alternative capital investment projects are being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at as to which is the most profitable project.

13 [Chapter 1] Introduction to Cost and... O 2.13 (vii) Discretionary Cost: These are escapable or avoidable cost. These can be avoided if a particular course of action is not chosen. In other words, these are cost, which are essential for the accomplishment of a managerial objective. (b) Irrelevant Costs: These are costs which are not relevant or useful for decision-making. (i) Sunk Cost: It is a cost which has already been incurred or sunk in the past. It is not relevant for decision-making and is caused by complete abandonment as against temporary shut-down. Thus, if a firm has obsolete stock of materials amounting to ` 10,000 which can be sold as scrap for ` 2,000 or can be utilised in a special job, the value of opening stock of ` 10,000 is a sunk cost and is not relevant for decision-making. (ii) Committed Cost: A cost which has been already committed by the management is not relevant for decision-making. This should be contrasted with discretionary cost, which is avoidable cost. (iii) Absorbed Fixed Cost: Fixed cost which does not change due to increase or decrease in activity is irrelevant for decision-making. Although such fixed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision-making. However if fixed costs are specific, they become relevant. OTHER COSTS 1. Explicit Cost: This is also known as out of pocket cost. It refer to cost involving immediate payment of cash. Salaries, wages, postage and telegram. 2. Implicit Cost: This cost do not involve any

14 2.14 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) immediate cash payment. It is not recorded in the books of account. It is also known as economic cost or imputed cost. 3. Estimated cost: Estimated cost are prospective cost since they refer to prediction of cost. 4. Shut down cost: In other words, all fixed cost which cannot be avoided during the temporary closure of a plant will be known as shut down cost. 5. Absolute cost: It refers to the cost of any product, process or unit in its totality. Here the cost depicted in absolute amount may be called absolute cost and are base cost on which further analysis and decisions are based. COST SHEET Meaning: A Cost Sheet is a statement which shows the break-up and build-up of costs. It is a document which provides for the assembly of the detailed cost of a cost centre of a cost unit. Uses: The following are the uses of the Cost Sheet. 1. Presentation of Cost information. 2. Determination of Selling Price. 3. Ascertainment of Selling Price. 4. Product-wise and Location-wise Cost Analysis. 5. Inter-firm and Intra-firm Cost Comparison. 6. Preparation of Cost Estimates for submitting tenders / quotations. COST PERIOD The period to which the Cost relates is called Cost period. It is also called the control period since cost ascertainment is for the purpose of control. Generally, the cost period is shorter than the financial period used for reporting purposes. Cost Centre & Its Classification:

15 [Chapter 1] Introduction to Cost and... O 2.15 CLASSIFICATION 1. Based on Type: Personal Cost Centre Impersonal Cost Centre It consists of a person or group of persons. It consists of a location or an item of equipment or group of these. 2. Based on Role: Production Cost Centre Service Cost Centre It is a cost centre where raw material is processed and converted into finished product. Here both direct and indirect costs are incurred. Machine shops, welding shops and assembly shops are examples of production cost centres. It is a cost centre which serves as an ancillary unit and renders services to a production cost centre. Here only indirect cost is incurred. This is not a direct cost and has no measurable and saleable output. Power-house, gas production shop, material service centres, plant maintenance centres are examples of service cost centres.

16 2.16 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) 3. Based on Activity Operation Cost Centre It consists of machines and / or persons, carrying out similar operations. All machines / operators performing the same operation are brought together under a cost centre, the purpose being ascertainment of cost of each operation. Process Cost Centre It consists of machines and / or persons, engaged on a specific process or a continuous sequence of operations. Cost is analysed and related to a series of operations in sequence. COST UNIT It is a unit of production, service or time or combination of these, in relation to which costs may be ascertained or expressed. Cost units differ from one business to the other. They are usually units of physical measurement like number, weight, area, volume, time, length and value. Illustrations are as under: Industry or Product Cost Unit Industry or Product Cost Unit Paints Litres Automobiles Number Cement Tonne Gas Cubic metre Power Kilo-watt hour Brickworks Thousands Transport Tonne - kilometre or Passenger- kilometre Interior Decoration Each Contract RESPONSIBILITY CENTRE It is an activity centre of a business organisation entrusted with a special task. It is a unit of function of a business organisation headed by an executive responsible for its performance.

17 [Chapter 1] Introduction to Cost and... O 2.17 TYPES OF RESPONSIBILITY CENTRES Particulars Cost Centres Revenue Centres Profit Centres Investment Centres Meaning A centre for which a standard amount of cost is predetermined and used for control. A center devoted to A centre whose raising revenue (no performance is responsibility for measured in terms production) of income earned and cost incurred (profit earning) Primary Cost reduction and Generation of sale Profit earning responsibility cost control revenue. Performance evaluation DIFFERENCE ACCOUNTING Standard cost less actual cost Budgeted revenue less actual revenue Budgeted profits less actual profits A centre responsible for earning profits and also for asset utilisaiton. Earning return of investments Budgeted ROI less actual ROI. BETWEEN FINANCIAL ACCOUNTING AND COST Particulars Financial Accounting Cost Accounting 1. Users of Information 2. Nature/ Objectivity Financial statements are u s e d b y i n t e r n a l management and also outside parties like Government, Customers, etc. Transactions are recorded in a subjective manner. Accounting Policies may differ from one firm to another. Detailed cost information is presented to internal management for proper planning, d e cisionmaking and cost control. Creditors, Employees Expenditure is recorded in an objective manner. Costing principles and techniques are generally uniform to all firms. 3. Focus Focus of accounting is on Focus of accounting is to recording the transactions. control cost.

18 2.18 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) 4. Statutory Requirements Requirements of Companies Act and the Income Tax Act are to be met t h r o u g h Accounting. F i n a n c i a l Generally Cost Accounting is voluntary except when Cost Accounting Records Rules apply to the enterprise. 5. Nature of Costs Generally historical costs It considers both historical are used for recording costs and pre-determined purposes. Projected costs and extends to financial statements may plans and policies to also be drawn f or i m p r o v e f u t u r e budgeting purposes. performance. 6. Time period One year. Continuous basis year. 7. Cost Analysis Cost / Expenditure and Profits are shown as a whole for the period. Costs are analysed product wise, department-wise, activity-wise etc. 8. Stock valuation Stocks are valued at Cost Stocks are valued or Net Realisable Value generally at cost. whichever is less. Difference between Cost Accounting and Management Accounting. Cost Accounting 1. It deals with ascertainment allocation, apportionment and accounting aspect of costs. 2. It provides a base for management accounting. 3. The status of cost accountant comes after the management accountant. Management Accounting It deals with the effect and impact of costs on the business. It is derived from both cost accounting and financial accounting. Management accountant is senior in position to cost accountant.

19 [Chapter 1] Introduction to Cost and... O It has a narrow approach. He has to refer to economic and statistical data for analysing cost effects. 5. It does not include financial accounting, tax planning and tax accounting. 6. It can be installed without management accounting. It reports the effect of cost on the business alongwith cost analysis. It includes financial and cost accounting, tax planning and tax accounting. It needs financial and cost accounting as its base for its installation. METHODS OF COSTING 1. Job Costing: The cost of each job is ascertained separately. It implies that the direct cost of each job is traceable and identifiable. It is suitable in all cases where work is undertaken on receiving a customer s order/ assignment. Some examples are printing press, motor workshop, etc. 2. Batch Costing: It is used where the output under a particular work order consists of similar units. It may not be economically feasible to ascertain cost per unit. Hence a collection or a lot of units called a batch is taken for cost ascertainment purposes. Each batch is treated as a unit of cost and thus separately costed. Here cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch. 3. Contract Costing: A larger job is called a contract. Generally, execution of work is distributed over two or more financial years. Hence, the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads, buildings etc. 4. Single or Output Costing: Cost is ascertained for a product, the product being the only one produced like bricks, coals, etc. 5. Process Costing and Operation Costing: The cost completing each stage of work is ascertained, like cost of making pulp and cost of making paper from pulp. In mechanical operations, the cost of each operation may be ascertained separately, the name given is operation costing. 6. Operating or Services Costing: Ascertainment of cost of rendering or operating a service is called Service Costing or Operating Costing. It is used in the case of concerns rendering services like transport, cinema, hotels, etc. where there is no identifiable tangible cost unit.

20 2.20 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) 7. Multiple Costing: It represents a combination of two or more methods of costing outlined above. For example, if a firm manufactures bicycles including its components; the parts will be costed by batch costing system but the cost of assembling the bicycle will be computed by the Single or output costing method. The whole system of costing is known as multiple costing. Nature of Output Method Cost Ascertainment Examples of industries Output based on Customer Specifications: Single Unit Job Costing For each order/ assignment/ job Automobile workshop/ Decoration. Interior Number of similar units Batch Costing For each batch/lot of units produced Printing Press for cards, invitations etc./pharmaceutical Execution of work Contract costing For each contract Civil Construction / Ship Building Similar units of a single product, produced by: Single process A series of Process Unit or Output or single Costing Process Costing or Operation Costing Consisting of Multiple Costing multiple varieties of activities and processes Rendering of Services Operating Costing For the entire Quarries, activity, but averaged for the output brickworks, Colliery, Paints etc. For each Process or operation Oil Refining, breweries, Chemicals etc. Combination of any Bicycle Assembly of the methods listed above For every type of service Transport, Cinema Hotels, FOR ASCERTAINING COST, FOLLOWING TYPES OF COSTING ARE USUALLY USED 1. Uniform Costing: When a number of firms in

21 [Chapter 1] Introduction to Cost and... O 2.21 an industry agree among themselves to follow the same system of costing, by adopting common terminology for various items and processes they are said to follow a system of uniform costing. Such a system of cost ascertainment facilitates inter-firm comparison, determination of true costs of the industry. 2. Marginal Costing: It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of decision-making on various management issues. Under this method, stocks are valued at variable cost. Fixed Costs are treated as period costs are not included in Stock Valuation. 3. Absorption Costing : It is the practice of charging all costs, both variable and fixed to operations, processes or products. Stocks are valued at total cost, inclusive of proportionate amount of fixed costs. This differs from marginal costing where fixed costs are excluded. 4. Direct Costing: It is the practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in which they arise. It may be distinguished from Marginal Costing, where only variable costs are identified with products. 5. Standard Costing: It is the name given to the technique whereby actual costs are compared with already set standards. It is thus a technique of both cost ascertainment and cost control. This technique may be used along with any method of costing. It is especially suitable

22 2.22 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) where the manufacturing method involves production of standardisation of repetitive nature. 6. Historical Costing: It is the ascertainment of costs after they have been incurred. This type of costing has limited utility. REPORTS PROVIDED BY THE COST ACCOUNTING DEPARTMENT FOR DECISION-MAKING PURPOSE 1. General: (a) Cost Sheets: Setting out the Total cost, analysed into various elements of cost, giving comparative figures for various periods and / or various departments. (b) Reconciliation of actual profit earned with estimated or budgeted profit. (c) Reports of Capital Expenditure, R&D Expenditure etc. compared with budgets. 2. Materials: (a) Materials consumption statements, showing total quantity of materials issued for production, materials actually used in production and wastage. (b) The total cost of abnormally spoiled work in the factory and abnormal losses in the store 3. Labour: (a) Labor utilisation statements providing details about the total number of hours paid for, standard hours for the output, idle time hours, cost and causes thereof. (b) Labour turnover, and the cost of recruitment and training of new employees. (c) Labour Overtime payment statement, and the causes thereof.

23 COST ACCOUNTING STANDARDS: [Chapter 1] Introduction to Cost and... O Overheads: (a) Overheads incurred compared with budgets. (b) Overheads actually charged to production and the difference between the amount actually incurred (Actual Overheads) and the amount charged (Absorbed Overheads). 5. Sales: (a) Sales effected compared with budgets. (b) Statements of reasons for difference between budgeted and actual sales viz. Price, Quantity, Sales Mix etc. Cost Accounting Standards (CAS) had been issued by the Institute of Cost Accountants of India (ICAI). The Preface to Cost Accounting Standards issued by the ICAI has set out the following objectives to be achieved through CAS: (a) To provide better guidelines on standard cost accounting practices; (b) To assist cost accountants in preparation of uniform cost statements; (c) To provide guidelines to bring standard approach towards maintenance of cost accounting records under various statutes; (d) To assist the management to follow the standard cost accounting practices in the matter of compliance with statutory obligations; and (e) To help Indian industry and the government towards better cost management. The Board has so far released 15 Cost Accounting Standards and document on Generally Accepted Cost Accounting Principles (GAAP), which are as under:

24 2.24 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) LIST OF COST ACCOUNTING STANDARDS CAS No. Title Objective CAS 1 Classification of Cost F o r p r e p a r a t i o n o f C o s t Statements. CAS 2 Capacity For determination of capacity. CAS 2 (Revised 2012) Determination Capacity Determination To bring uniformity and consistency in the principles and methods of determination of capacity with reasonable accuracy. CAS 3 Overheads For Collection, Allocation, Apportionment and Absorption of overheads. CAS 3 (Revised 2011) Overheads To bring uniformity and consistency in the principles and methods of determining the overheads with reasonable accuracy. CAS 4 Cost of Production for To determine the assessable value Captive Consumption of excisable goods used for captive consumption. CAS 5 Average (equalized) To determine averaged/equalized Cost of Transportation transportation cost. CAS 6 Material Cost T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the material cost with reasonable accuracy in an economically feasible manner.

25 [Chapter 1] Introduction to Cost and... O 2.25 CAS 7 Employee Cost T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the Employee cost with reasonable accuracy. CAS 8 Cost of Utilities T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the Cost of Utilities with reasonable accuracy. CAS 9 Packing Material Cost T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the Packing Material Cost with reasonable accuracy. CAS 10 Direct Expenses T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the Direct Expenses with reasonable accuracy. CAS 11 CAS 12 A d m i n i s t r a t i v e Overheads R e p a i r s a n d Maintenance Cost To bring uniformity and consistency in the principles and methods of determining the Administrative Overheads with reasonable accuracy. To bring uniformity and consistency in the principles and methods of determining the Repairs and Maintenance Cost with reasonable accuracy.

26 2.26 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) CAS 13 CAS 14 CAS 15 Cost of Service Cost Centre To bring uniformity and consistency in the principles and methods of determining the Cost of Service Cost Centre with reasonable accuracy. Pollution Control Cost T o b r i n g u n i f o r m i t y a n d consistency in the principles and methods of determining the Pollution Control Costs with reasonable accuracy. Selling & Distribution Overheads To bring uniformity and consistency in the principles and methods of determining the selling and distribution overheads with reasonable accuracy. CS Executive Programme (Module I) OBJECTIVE QUESTIONS Dec [5] (b) Choose the most appropriate answer from the given options in respect of the following: (iii) The type of process loss that should not affect the cost of inventories is: (a) Abnormal loss (b) Normal loss (c) Seasonal loss (d) Standard loss. (1 mark) (c) Re write the following sentences after filling up the blank spaces with appropriate word (s)/ figure (s) : (i) Cost is a fact whereas price is a. (ii) Imputed costs are relevant for.

27 [Chapter 1] Introduction to Cost and... O 2.27 (iii) A is the cost that has already been incurred and cannot be avoided by decisions taken in the future. (iv) A profit centre is a division or organisational unit concerned with controlling both and costs. (1 mark each) Answer : (b) (iii) (a) Abnormal loss (c) (i) policy; (ii) decision making; (iii) sunk cost; (v) sales / (revenue); June [5] (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figures(s) : (ii) Abnormal wastage part of cost of production. (iv) Direct material + direct labour + factory overheads =. (1 mark each) Answer : (b) (ii) is not (iv) Factory cost/works cost Dec [5] (b) Choose the most appropriate answer from the given options in respect of the following : (iii) Non-controllable cost is the cost which (a) Is not subject to control at any level of managerial supervision (b) Cannot be controllable during a particular financial year (c) Cannot be controllable at any cost (d) None of the above. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (v) is the allotment of proportion of items of cost to cost centre/cost units. (1 mark) (b)(iii) (a) (c) (v) Apportionment

28 2.28 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) June [5] (b) Choose the most appropriate answer from the given options in respect of the following: (iv) Fixed costs remain fixed (a) Over a short period (b) Over a long period and within relevant range (c) Over a short period and within a relevant range (d) Over a long period. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s): (i) expenses are excluded from cost. (1 mark) Answer : (b) (iv) (c) (c) (i) Notional Dec [5] (b) Choose the most appropriate answer from the given options in respect of the following : (v) The management accounting is an extension of (a) Financial accounting (b) Responsibility accounting (c) Cost accounting (d) All of the above. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (iv) costs are not useful for decision making as all past costs are irrelevant. (1 mark) Answer : (b) (v) (d) All of the above. (c) (iv) Sunk costs are not useful for decision making as all past costs are irrelevant June [5] (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (iii) A responsibility centre in which a manager is accountable for costs only is called. (1 mark) Answer : (iii) A responsibility centre in which a manager is accountable for cost only is called Cost centre

29 [Chapter 1] Introduction to Cost and... O Dec [5] (b) Write the most appropriate answer from the given options in respect of the following: (i) Opportunity cost helps in (a) Ascertainment of cost (b) Controlling cost (c) Making managerial decisions (d) None of the above. (ii) Fixed cost per unit-increases when (a) Production volume decreases (b) Production volume increases (c) Variable cost per unit decreases (d) Variable cost per unit increases. (v) The type of spoilage that does not affect the cost of inventories is (a) Normal spoilage (b) Standard spoilage (c) Abnormal spoilage (d) Seasonal spoilage. (1 mark each) Answer : (b) (i) (c) Making management decisions (ii) (a) Production volume decreases (v) (a) Normal spoilage June [5] (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Variable cost per unit does not remain. (1 mark) Answer : (i) Variable June [5] (b) Write the most appropriate answer from the given options in respect of the following: (ii) Differential cost analysis is incorporated in the (a) Cost books (b) Financial books (c) Statutory books (d) None of the above. (1 mark)

30 2.30 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s): (i) A document which provides for assembly of different costs in respect of a cost centre or a cost unit is called. (1 mark) (b) (ii) (a) Cost books. (c) (i) Cost sheet Dec [16] Which of the following is not true? Fixed costs remain fixed - (a) Over a short period (b) Over a long period and within relevant range (c) Over a short period and within a relevant range (d) Over a long period. (c) Over a short period and within a relevant range (1 mark) Dec [22] Which of the following costs are treated as product cost under variable costing- (a) Only direct costs (b) Only variable production costs (c) Only material and labour costs (d) All variable and fixed manufacturing costs. (1 mark) (b) Only variable production costs Dec [44] The term used for process of ascertaining the cost is known as (a) Cost (b) Costing (c) Cost accounting (d) Cost accountancy. (1 mark) (b) Costing

31 [Chapter 1] Introduction to Cost and... O Dec [47] The cost that increases as the volume of activity decreases within the relevant range, is known as (a) Average cost per unit (b) Average variable cost per unit (c) Total fixed cost (d) Total variable cost. (1 mark) (a) Average cost per unit Dec [51] Which of the following is not considered as a function of management accounting (a) Financial planning (b) Decision making (c) Reporting (d) Cost computation. (1 mark) (d) Cost computation Dec [61] The cost of selecting one course of action and forgoing the other is known as- (a) Sunk cost (b) Differential cost (c) Opportunity cost (d) Joint cost. (1 mark) (c) Opportunity cost Dec [62] Companies characterised by the production of heterogeneous products will most likely use which of the following methods for the purpose of averaging costs and providing management with unit cost data- (a) Process costing (b) Job-order costing (c) Direct costing (d) Absorption costing. (1 mark) (b) Job-order costing Dec [84] For a manufacturing company, which of the following is an example of period cost rather than a product cost (a) Depreciation on factory equipment (b) Commission to salesman (c) Wages of machine operator (d) Insurance on factory equipment. (1 mark) (b) Commission to salesman

32 2.32 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) June [23] Which of the following is an objective to be achieved through Cost Accounting Standards (a) To assist cost accountants in preparation of uniform cost statements (b) To provide better guidelines on standard cost accounting practices (c) To help Indian industry and the Government towards better cost management (d) All of the above. (d) All of the above. (1 mark) June [32] Rent, rates and insurance of factory and office are examples of (a) Direct expenses (b) Indirect expenses (c) Notional expenses (d) Miscellaneous expenses. (1 mark) (b) Indirect expenses June [40] Which of the following is generally used as cost unit in cement industry (a) Per tonne (b) Per kilolitre (c) Per kilogram (d) Per gallon. (1 mark) (a) Per tonne June [42] The objective of CAS-1 is (a) Collection, allocation, apportionment and absorption of overheads (b) Determination of capacity (c) Preparation of cost statement (d) Determination of average/equalised transportation cost. (1 mark) (c) Preparation of cost statement

33 [Chapter 1] Introduction to Cost and... O June [44] Which of the following is not an objective of management accounting (a) Formulation of plans and policy (b) Assisting in decision making (c) Preparation of financial statements (d) Interpretation of financial documents. (1 mark) (c) Preparation of financial statements June [51] According to Chartered Institute of Management Accountants (CIMA), cost attribution to cost units on the basis of benefits received from indirect activities e.g. ordering, setting-up, assuring quality is known as (a) Absorption costing (b) Marginal costing (c) Activity based costing (d) Job costing. (1 mark) (c) Activity based costing June [56] The establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds is known as (a) Costing (b) Cost Accounting (c) Cost Accountancy (d) Financial Accounting. (1 mark) (b) Cost Accounting June [58] Costs which are constant for a given level of output and then increase by a fixed amount at a higher level of output are called (a) Step costs (b) Differential costs (c) Committed costs (d) Opportunity costs. (1 mark) (a) Step costs

34 2.34 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) June [60] Interest on internally generated funds is an example of (a) Differential cost (b) Joint cost (c) Common cost (d) Imputed cost. (1 mark) (d) Imputed cost June [68] Cost unit applicable to bicycle industry is (a) Per part of bicycle (b) Per bicycle (c) Per thousand bicycles (d) Per day. (b) Per bicycle June [72] Sunk costs are - (a) Opportunity costs (b) Costs to be incurred in future (c) Not relevant for decision making (d) Controllable costs. (c) Not relevant for decision making (1 mark) (1 mark) June [77] Fixed cost is a cost - (a) Which remains fixed for each unit of output (b) Which remains fixed in total during a given period despite changes in output (c) Which is partly fixed and partly variable in relation to the output (d) Which changes in total in proportion to the changes in output. (1 mark) (b) Which remains fixed in total during a given period despite changes in output

35 [Chapter 1] Introduction to Cost and... O Dec [1] In management accounting, firm decisions on pricing policy can be taken. Reason (R): As marginal cost per unit is constant from period to period within a short span of time. Select the correct answer from the option given below (a) Both A and R are true and R is the correct explanation of A (b) Both A and R are true, but R is not the correct explanation of A (c) A is true, but R is false (d) A is false, but R is true. (1 mark) (a) Both A and R are true and R is the correct explanation of A Dec [12] A business unit is known to be a profit centre (a) If its operations or departments are not directly involved in revenue generating activities, but instead focus on elements of cost control (b) If its management is evaluated not only on revenues and expenses, but also on asset investment (c) If its management is compensated based on the level of profitability (d) If its management is held accountable for both revenues and expenses and has the authority to make decision regarding its products, markets and source of supply. (1 mark) (d) If its management is held accountable for both revenues and expenses and has the authority to make decision regarding its products, markets and source of supply Dec [36] Statement - I The activities or operations of every cost centre should be homogeneous so as to ensure uniform basis of charging expenses within the centre. Statement-II The activities or operation of each cost centre must be well defined and clearly identifiable. Select the correct answer from the following- (a) Both statements are correct (b) Both statements are incorrect (c) Statement-I is correct, but Statement-II is incorrect

36 2.36 O Model Solved Scanner CSEP M-I Paper 2 (New Syllabus) (d) Statement-I is incorrect, but Statement-II is correct (a) Both statements are correct (1 mark) Dec [41] Allotment of the entire costs to a cost centre or unit is known as. (a) Cost apportionment (b) Cost allocation (c) Cost absorption (d) Machine hour rate. (1 mark) (b) Cost allocation Dec [49] Match the following: List-I List-II P. Cost control purposes 1. is a predetermined cost Q. Standard cost 2. Responsibility accounting fixes responsibility for R. Integrates 3. Cost accounting guides future S. Production policies 4. Budgeting system key managerial functions Select the correct answer from the options given below- P Q R S (a) (b) (c) (d) (1 mark) (b) P Q R S Dec [52] Assertion (A) : Cost accounting hides the relative efficiencies of different workers. Reason (R) : Cost accounting does not disclose profitable and non-profitable activities. Select the correct answer from the following-

37 [Chapter 1] Introduction to Cost and... O 2.37 (a) Both A and R are true and R is the correct explanation of A (b) Both A and R are true, but R is not the correct explanation of A (c) A is true, but R is false (d) Both A and R are false (1 mark) (d) Both A and R are false Dec [87] Management accounting is basically concerned with (a) The problem of choice (b) Causative relationship (c) Recording of transaction (d) Both (A) and (B) above. (1 mark) (d) Both (A) and (B) above Dec [88] Cost accounting is (a) Nothing more than a detailed analysis of expenditure (b) An instrument of management control (c) Useful only in such organisation which has profit as the aim (d) Not needed if prices are beyond the control of the firm. (1 mark) (b) An instrument of management control Dec [90] Conversion cost is the summation of (a) Direct material and direct wages (b) Direct wages and office overheads (c) Direct wages, direct charges and works overheads (d) None of the above. (1 mark) (c) Direct wages, direct charges and works overheads Dec [91] A cost centre which is engaged in production activity by conversion of raw material into finished product is called (a) Production cost centre (b) Impersonal cost centre (c) Process cost centre (d) Production unit. (1 mark) (a) Production cost centre June [8] A direct cost is a cost which can be classified on the basis